IT Outsourcing in 2010: Smaller Deals, Higher Volume

Last year the economic downturn caused some organizations to temporarily scale back on IT outsourcing efforts while they tackled more fundamental issues like keeping the company afloat.

This year, IT outsourcing is making a comeback... in Asia.

Dell Services (NASDAQ:DELL) Chairman Jim Champy predicts the Asian IT outsourcing market will grow much faster in 2010. “IT outsourcing is set to rise in Asia as the region's companies begin to modernize business processes and technology systems in a build-out that could last decades. We see, as most providers do, the Asian markets growing faster - clearly more than Europe, and certainly faster than the US,” explains Mr. Champy.

Offshore service providers who made significant investments in technology-related matters may have made the right move at the right time. As firms are already taking steps to outsource some information technology functions. One of them is U.S.-based commercial aircraft equipment manufacturer, Spirit AeroSystems (NYSE:SPR), where some of its employees affected by the outsourcing plan will be offered jobs with International Business Machines Corporation (NYSE:IBM) or Hewlett-Packard (NYSE:HPQ) –the providers taking over Spirit’s IT work, both of which have operations in Asia. Spirit spokesperson Ken Evans admits to not ruling out additional work that may be sourced out to offshore providers in the future.

A report from KPMG and the Asian-Oceanian Computing Industry forecasts that Asia will account for 26.3% of the total consumption of IT and BPO services in the next 10 years. In the last quarter of 2009, Accenture (NYSE:ACN) and Capgemini expanded their presence in Asia particularly in the IT services segment. This proves that clients and partners remain attracted to the abundance of technical skills at a low cost.

KPMG’s forecast may happen in the long-run but for the time being service providers are feeling the recovery at smaller proportions but at a higher volume of job requests. According to IBM and Accenture executives, “IT consultants are probably already feeling it: the start of a rebound in business. But there's a difference this time. The rebound is coming mostly in smaller deals rather than in gigantic ones... customers are contracting for a higher volume of smaller jobs.”

Small deals comprise a significant fraction of IBM's and Accenture’s total revenue stream. So it no longer came as a surprise when Accenture acquired RiskControl, a privately held IT consulting company. The acquisition is expected to improve Accenture’s set of risk management services as it tries to gain a strong foothold in the IT offshoring market.

Interestingly, technology vendors acquired technology consulting firms at a quick pace in 2009. Others who made similar acquisitions were Affiliated Computer Services or ACS (ACS), now a Xerox (NYSE:XRX) company, and Perot Systems (NYSE:PER). I guess they may all be getting ready to grab a chunk of the incoming deals.